LONDON (Reuters) – Global investors, fearful of the escalating euro zone sovereign debt crisis and slowing world economy, retreated sharply from equities in May and held more cash than at any stage since the crisis erupted in early 2010, a Reuters poll showed on Thursday.
The survey of 57 investment firms in the United States, continental Europe, Britain and Japan showed aggregate cash weightings in balanced portfolios as high as 7.1 percent in May, up 1.5 points on April and the highest since global poll records were first compiled in January 2010.
A drop of almost four percentage points in equity held in global portfolios to just 48.4 percent was the biggest monthly cut in equity recorded by the poll over the same period, and aggregate holdings are below 50 percent for only the third time since the start of 2010.
Although most funds polled still expect Greece to be in the euro at least through 2013, managers said there was reason to be fearful of a situation that is now touch-and-go. The outcome of the latest Greek election on June 17 may be a decider, with implications for financial and economic stability worldwide.
Although risky assets in general were shunned worldwide, the ongoing desertion of euro zone securities and regional equity there in particular was clear.
For the first time on record in the poll, global funds on aggregate now hold more Japanese equity in their portfolios than equity from the 17-nation euro bloc. Euro zone equity holdings in global portfolios were more than twice that of Japan just 20 months ago.
“The only thing certain in Europe at this time is that the uncertainty has a long way to go,” said Lee Robertson, Chief Executive at Investment Quorum.
Global investors’ holdings of euro zone equities fell around three percentage points to 12.9 percent this month. That is not only below the 14 percent held in Japan, but is only a sliver above the 12.3 percent weighting for UK stocks and little more than a quarter of North American holdings.
Global markets nosedived this month after Greek elections on May 6 showed a surge in support for anti-austerity parties and left no party in a position to form a government. A new election will be held on June 17 but opinion polls remain inconclusive.
In the meantime, Spain’s banking crisis has intensified, leading to the nationalisation and recapitalisation of lender Bankia – a move that has sent both Spanish and Italian government borrowing rates soaring.
France’s presidential election, also on May 6, was won by Socialist Francois Hollande, who has since set about trying to modify December’s fiscal pact with pro-growth measures, leaving next month’s European Union summit a host of policy dilemmas.
Most managers cited the heightened risk of an imminent Greek euro exit due to doubts about its bailout programme, while growing fears about an adequate policy response from the rest of the bloc were already affecting financial stability and economic confidence worldwide.
“The current political constellation makes a Greek exit from the euro zone a possible near-term scenario,” said Elke Speidel-Walz, chief investment strategist for Germany at Deutsche Bank Private Wealth Management.
What’s more, “growth is gradually coming more into focus, with disappointing recent indicators in China, Brazil, India and others,” Speidel-Walz said.
Many asset managers said they felt the Greek saga had now reached a denouement, with the permutations and combinations of what could happen too complex to leave portfolios overexposed.
“If Greece does exit, investors will need to be reassured that sufficient firewalls have been put in place to prevent contagion,” said Mark Robinson, Chief Investment Officer at Berry Asset Management.
“Unfortunately, there is no ability or time to stage a dress rehearsal, hence volatility in markets is likely to continue until some form of an acceptable compromise is reached.”
MONEY GOING TO GROUND
Apart from the jump in cash, the overall exit from global equity in May led to bond holdings rising 1.7 points to 36 percent during the month and also saw a half-point rise to 7.0 percent in so-called alternative investments such as hedge funds, private equity, infrastructure and the like.
“Capital preservation remains at the core of our strategy in a period of intense uncertainty and market volatility,” said Neil Michael, executive director of investment strategies at London & Capital.
Regional breakdowns showed slight increases in U.S., British and Japanese equity holdings at the expense of the euro area but emerging markets in eastern Europe and non-Japan Asia were also suffering, in part due to events in the euro zone but also because of worries about China’s economic slowdown.
Bond holdings also rose in the UK, Japan and euro zone, where government bonds in Britain, Japan and Germany were beneficiaries of a flight to perceived safety. But North American bond holdings fell overall.
As a result, overall holdings of government securities within fixed income portfolios fell below 50 percent for the first time in the sample. With high-yield or junk debt holdings down too, the preference was for investment-grade corporate debt, which jumped 1.5 points to 30.1 percent this month.
“At negative real yields, there really isn’t any value to holding longer-duration assets on the fixed income side,” said David Goerz, chief investment officer of HighMark Capital Management.